The Ever Changing California Legal Landscape: Two Recent Developments in California Law Relevant to Factors

Written by: Benjamin M. Heuer, Esq., Chair of the Buchalter’s FinTech Practice Group, and Co-Chair of the Firm’s Alternative Lenders Practice Group.

In California, the legal landscape, like the earth’s crust beneath our feet, is always shifting.  In recent years, certain of those shifts could be felt across the country as the California Commercial Financing Disclosure Law set off a wave of similar disclosure laws across the country.  Now, factors should be aware of two recent changes in California law that were implemented in the wake of the disclosure law.

Amendment to California “Junk Fee” Law

First, in a likely welcome development to factors, Governor Newson recently signed SB-1521 which amends the California “junk fee” law, codified in Cal. Civ. Code §§ 1799.300-1799.304, to expand the circumstances under which a covered entity may charge a collateral monitoring fee. (1)

To understand the context of the amendment, a brief description of the exiting law is instructive.   According to the legislative history, the intent of the California legislature was to encourage competition by making pricing more transparent by eliminating certain hidden “junk fees” that may not be required to be disclosed to recipients under the California Commercial Financing Disclosure Law.  The California legislature predicted that, in response, commercial financing providers would respond by increasing their origination fee, interest rates, or other allowable finance charges to offset revenue lost by the proposed fee restrictions.  Nonetheless, the legislature concluded that this would still be a desirable outcome because small businesses would be better able to compare financing offers based on more all-inclusive pricing, rather than sifting through fine print for potential ancillary fees.

The existing law prohibits factors and other commercial financing providers from charging certain fees in connection with a commercial financing transaction with a small business or small business owner that are equal to or less than $500,000.  Among other fees, the law prohibits the charging of a fee for monitoring the small business’ collateral, unless the underlying commercial financing transaction is delinquent for more than 60 days.  

Providers raised concerns late in the legislative process that collateral monitoring fees should not be prohibited because they are a necessary component of pricing of factoring transactions and are tied to a service.  Accordingly, the author of the “junk fee” law and providers worked on compromise language that is codified in the amendment. (2)  With the recent amendment, effective January 1, 2025, commercial financing providers may charge a collateral monitoring fee if any of the following is true:

(A) The commercial financing transaction is an asset-based loan or factoring, and the fee is intended to compensate the covered entity [commercial financing provider] for actions taken to validate the collateral with the intended purpose of maximizing the amount of financing provided to the small business or small business owner under the financing contract pursuant to which the fee is charged.

(B) The fee is expressed as a dollar amount or a percentage of an identifiable base, and the fee is deemed a finance charge, as described in Section 943 of Subchapter 3 of Chapter 3 of Title 10 of the California Code of Regulations (which incorporates Reg Z into the California Commercial Financing Disclosure regulations).

(C) The commercial financing transaction is delinquent for more than 60 days.

Most non-default collateral monitoring fees are likely finances charges under Reg Z because they are “an incident to or condition of the extension of credit”. Therefore, the recent amendment appears to substantially broaden the ability of providers to charge a collateral monitoring fee.  Even if a court were to find that the collateral monitoring fee is not a finance charge, providers may still charge a collateral monitoring fee if it is intended to compensate the provider for actions taken to validate the collateral for the intended purpose of maximizing the funding provided by the factor.

The policy behind this amendment makes sense.  If collateral monitoring fees are finance charges subject to disclosure under the California Commercial Financing Disclosure Law, recipients in commercial financing transactions will be able to “comparison shop” if the fee is computed in a transparent manner and included in a disclosure.  If the collateral monitoring fees are not subject to disclosure, the fees would still be permitted if they are intended to compensate the covered entity for the desirable goal of maximizing the financing available to the California recipient.

While it is unclear whether there will be any further fine-tuning of the “junk fee” law, from the perspective of factors this amendment is a step in the right direction.

Annual Report for Providers that Offer Commercial Financing

In connection with the California Commercial Financing Disclosure Law, the California Department of Financial Protection and Innovation implemented 10 CCR 1062, which generally requires non-licensed commercial financing providers to submit information about their transactions with California small businesses.  

On or before March 15 of each year, beginning in 2025, any covered provider who offers commercial financing to covered entities shall file electronically through the department's website a report verified by an authorized officer and containing the following information for activity during the preceding calendar year:

(1) The covered provider's identifying and contact information, including name, any fictitious business names, entity type, mailing address, phone number, email address, website address, and designated contact person.

(2) By type of commercial financing, the total number and total dollar amount of commercial financing transactions with covered entities. The dollar amount of a commercial financing transaction is the "amount financed" as defined in the Commercial Financing Disclosures regulations.

(3) By type of commercial financing, the number of commercial financing transactions with covered entities for the following amounts financed: $ 10,000 or less, over $ 10,000 but not over $ 25,000, over $ 25,000 but not over $ 50,000, over $ 50,000 but not over $ 100,000, over $ 100,000 but not over $ 250,000, and over $ 250,000 but not over $ 500,000. 

(4) By type of commercial financing and for each interval described in paragraph (3), the minimum, maximum, average, and median annual percentage rate disclosed in disclosures required to comply with California Commercial Financing Disclosure regulation. For a given type of commercial financing and interval, if the covered provider did not provide any disclosures required to comply with section 920, subdivision (a), the covered provider is not required to calculate or report the information described in this paragraph and shall so indicate.

The above reporting requirement does not apply to  any covered provider who makes no more than one commercial financing transaction to covered entities in a 12-month period or any covered provider who makes five or fewer commercial financing transactions to covered entities in a 12-month period that are incidental to the business of the covered.  Moreover, a covered provider who is licensed under the California Financing Law is not required to submit in any report required under this regulation information for activity conducted under the authority of the California Financing Law license.  

It seems likely that the department may use the submitted reports to monitor compliance with the California Commercial Financing Disclosure Law.  Accordingly, as factors begin to compile data for these reports, they should also confirm their compliance with the disclosure law.

(1) California Senate Rules Committee Office of Senate Floor Analyses, SB 666.

(2) California Senate Judiciary Committee Comments, SB 1521.

About Benjamin Heuer:

Benjamin Heuer, Esq. is Chair of the Buchalter’s FinTech Practice Group, and Co-Chair of the Firm’s Alternative Lenders Practice Group. His practice focuses on matters involving asset based lending, factoring, corporate finance, and loan workouts and restructurings. He represents banks, asset based lenders, factors, specialty finance companies and other non-bank financial institutions in connection with senior-secured, asset-based, syndicated, mezzanine, cross-border, and unsecured financing. Mr. Heuer also represents private equity and other borrowers in connection with lender finance transactions.

In addition, Mr. Heuer advises FinTech companies on various aspects of their businesses, including products, operations, and regulatory matters, with particular emphasis on California’s commercial lending license issues and matters before the California Department of Financial Protection and Innovation.

Mr. Heuer has been recognized as one of Sacramento Magazine’s Top Lawyer in the field of Commercial Law since 2021.

The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.